Returns on property v high-end collectables

The determination by the super-rich to spend their way out of the gloom is reflected by activity in the luxury market

A recent visit to the South Pacific provided further evidence of a truth universally acknowledged: that while mass tourism to far-flung destinations is in the doldrums – down by as much as 60 per cent in Tahiti, for example – high-end hotels at the top end of the market are riding the waves with confidence, catering for a clientèle that occupies their sun-kissed suites and villas with nary a glance at the plummeting financial barometer.

The determination by high net worth individuals (HNWIs – defined by Knight Frank as individuals with more than US$30m net assets) to spend their way pleasurably out of the encircling gloom is reflected by activity in the luxury and collectables markets. According to China’s Hurun Report, 64 per cent of China’s millionaires are engaged in amassing collections. HNWIs – and particularly those from emerging markets – are buoying up prices in luxury goods that can be enjoyed, either in themselves, or as Old World status symbols: a bonus to the prospect of financial appreciation. As such, following the crash of 2008, collecting has joined real estate as an alternative to traditional financial investment vehicles for private wealth among the new super-rich, prompting international real-estate specialists Knight Frank to compile a report, to be released on 6 March, comparing the performance of luxury items over a period of 10 years. Dubbed the “Passion Index”, it charts investment performance in the key collecting areas of fine art, watches, wine, jewellery, and classic cars, among others (and in order of popularity), marking an interesting counterpoint to fluctuations in global real estate markets, and yielding occasionally surprising results.

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Unsurprisingly, fine art remains the most popular “investment of passion”, with iconic artworks such as Edvard Munch’s “The Scream” achieving US$107m (before the addition of the buyer’s premium) at Sotheby’s in May last year. As shown by the stratospheric prices reached in the major auction houses of London, New York and Hong Kong, modern and postwar masters – including Picasso, Giacometti, Modigliani, Rothko and Bacon – top the list, with demand for works by major artists filtering down throughout the art market. Jonathan Dodd, of Waterhouse & Dodd galleries in New York and London, says: “We have gone from being a gallery dealing in important and interesting works by many little-known artists, to dealing in major works by major artists. This has been a conscious decision to reflect prevailing market conditions – indeed global conditions, where the separation between the very rich and the rest seems to be at its greatest since the Victorian era. The very rich in those days put their money into art, and they are doing so again now, overheating the areas of the market that interest them – that is, the best of everything – and leaving the rest stone-cold.”

Although spending on fine art showed the greatest increase last year, the sector did not, at 199 per cent growth over 10 years to the third quarter of 2012, show the highest return on investment. That distinction goes to classic cars. With an astonishing growth of 395 per cent (according to the HAGI Classic Car Index), that sector has outperformed any other investment, with the single exception of gold (434 per cent). Furthermore, the return on coins (248 per cent), stamps (216 per cent) and fine wines (166 per cent) also shows that the best returns do not necessarily derive from the most popular investments, indicating that “passion” and prestige may be overriding purely financial considerations. Watches, the second most popular investment of passion, for instance (Hurun indicates that the average Chinese HNW male owns six luxury timepieces) appreciated by a mere 76 per cent over the period.

Statistics can, of course, easily be skewed by anomalies. In the case of classic cars, we may be seeing an echo of the 1970s, when fuel prices rocketed and high-performance cars were being sold off cheaply, affording, for example, the late Fabrizio Violati the opportunity to buy his collection of vintage Ferraris that form the basis of the Maranello Rosso museum in San Marino.

The demand for blue-chip excellence, moreover, permeates every area of the “passion” market, particularly among inexperienced collectors. This in turn can leave those markets vulnerable, as buyers gain the knowledge and confidence to expand beyond the security of “big names”. For example, the 19 per cent drop in the value of wines over the 12 months to September 2012, as seen in the Liv-ex 100 index, is due to the fall from grace of Château Lafite – the largest constituent of the index, and once the choice red of Chinese wine collectors. According to Andrew della Casa, director of The Wine Investment Fund, this can be attributed to Chinese buyers progressing to other red wines, the bursting of the artificial bubble precipitating an over-correction in the market.

It is estimated that only 4 per cent of HNWIs’ investment portfolios is anchored in collectables – a reflection, perhaps, of this sector’s susceptibility to changing taste, lack of regulation and the difficulty of liquefying such assets at short notice. It is, nevertheless, interesting to note that the best-performing luxury investments – cars, coins, stamps and art – have matched or out-performed prime property investments, over one-, five- and 10-year periods, in the indices of five key world cities: London, Paris, New York, Hong Kong and São Paolo.

According to Yolande Barnes, director of world research for Savills, investment activity in real estate by Old World billionaires from Europe and the US is abating, leaving “new money” from the Brics countries to play the field, purchasing properties in either their home cities, or cosmopolitan safe havens. As such, Hong Kong – and, to a lesser extent, Singapore – is the main beneficiary of Chinese and Asia-Pacific wealth, with prices per sq m topping the table in the prime property league, at $51,800. At the other end of the scale, São Paolo remains an overwhelmingly domestic market. With prime property currently valued at $7,500 per sq m, São Paolo is, according to Liam Bailey of Knight Frank, “an embryonic market for international buyers, and one to watch over the next few years”.

Despite the discrepancy in valuation, it is these two cities, according to Knight Frank’s research, that have shown the greatest growth over the last 10 years (221 per cent and 211 per cent, respectively), holding steady at 11 per cent and 18 per cent over the year to the third quarter of 2012.

As a safe haven and a global city, London – with prime property valued at $44,100 per sq m, remains the best performer in the Old World. Continuing to attract every nationality from Brics countries to Europeans and Americans, it has maintained a growth of 10 per cent over the past year (103 per cent over 10 years).

This is in contrast to New York, suffering from debt and austerity measures, and Paris, hit by taxation; cities which have shown negative growth over the last year (-3 per cent and -5 per cent, respectively). Paris, nevertheless – a favourite among Russian, UK and Middle Eastern buyers – still boasts a 117 per cent price growth over 10 years, with a four-bedroom apartment in the prestigious 16th arrondissement, currently touching €15m. Far from being out of the running, North America – including New York and the Ivy League university cities – is beginning to recover from deep discounts, once again offering good investment opportunities.

In the global real estate market, as with “investments of passion”, we are seeing similar patterns emerging: not only in the dominance of emerging nations, but also in a certain progression in investments. “When new money starts investing in real estate, it tends to buy what it is familiar with,” says Yolande Barnes.

“New money plays safe, and buys into well-known areas, such as London’s Belgravia. As people become more confident, they become more adventurous, and move further afield – as seen by the trend in Middle Eastern investment since the 1970s. Initially, Arab clients bought around Hyde Park, while the second and third generations are expanding as far as Richmond, Putney and even to the Docklands. It is a cyclical process. We can look forward to the next wave of activity from Indonesia, Malaysia, the Philippines – new players who will be looking for trophy properties in Europe or America, and who will probably once again favour the most prestigious London addresses.”

Meantime, the passionate collector can adorn his central London apartment with the art of modern masters, hedging his bets with the reasonable certainty that his money is well-placed.